Accounting For Public Companies

ACCOUNTING FOR PUBLIC
COMPANIES
by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – PGPSE PARTICIPANTS
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
Borad and Samsukha Finserv Ltd. issued 50,000
equity shares. The whole of the issue was
underwritten as follows:
Red 40%; White 30%; Blue 30%
Applications for 40,000 shares were received in all,
out of which applications for 10,000 shares had the
stamp of Red; those for 5,000 shares that of White
and those for 10,000 shares that of Blue. The
remaining applications for 10,000 shares did not
bear any stamp.
Solution
This is a question on underwriting. We have to
identify liability of underwriter. Liability of
Red = 20000, Blue and white : 15000 each.
The liability left out is : Red (20-10) = 10000,
Blue : (15-10) = 5000, white : (15-5) = 10000
unmarked applications are : 10000. divide it in
their ratio : 4000,3000,3000
final liaibility : Red : 6000,white : 7000 blue
2000 answer
Borad IT Ltd., issued 50,000 equity shares of
which only 60% was underwritten by Green.
Applications for 45,000 shares were received
in all out of which application for 26,000 were
marked.
Liability of Green : 30000-26000 = 4000
Samsukha Restate Ltd., issued 30,000 6%
Debentures of 100 each. 60% of the issue was
underwritten by Vivek Borar. Applications
for 28,000 debentures were received by the
company.
Liability = 18000, no information about

marked. So (30-28) 2000 is the total shares
outstanding, out of which 60% is the liability
(=1200) of underwriter Vivek Borar.
Goti Bikaneri Sweets Ltd., issued 12% 10,000
Preference Shares of rs. 10 each. The issue was
underwritten as follows:
A :30%, B : 30%, C : 20%.
Application for 8,000 shares were received by the
company in all. Determine the liability of the
respective underwriters.
Outstanding liability : 2000, 80% of which is

1600, so divide it in ratio : 3:3:2 in A, B,C.
Answer.
Borad Bikaneri Namkeen Ltd. issued 40,000 shares
which were underwritten as:
P: 24,000 shares Q: 10,000 shares and R: 6,000
shares. The underwriters made applications for firm
underwriting as under:
P: 3,200 shares; Q: 1,200 shares; and R: 4,000 shares.
The total subscriptions excluding firm underwriting
(including marked applications) were 20,000 shares.
The marked applications were - P: 4,000 shares; Q:
8,000 shares; and R: 2,000 shares.
Solution
Outstanding : 20000, received 20000out of
which 6000 were unmarked
(add firm undewriting to marked underwrting
once and then add it in final liability)
liabilities are p : 24000 – 4000-3200-5200 =
11600 + 3200 = 14800
Q 10000-8000-1200-800 = zero+1200=1200
r = 6000-2000-4000 = zero +4000= 4000
Solve the following question
Infosis invited applications from public for 1,00,000 equity
shares of Rs. 10 each at a premium of Rs. 5 per share. The
entire issue was underwritten by the underwriters A, B, C and
D to the extent of 30%, 30%, 20% and 20% respectively with
the provision of firm underwriting of 3,000, 2,000, 1,000 and
1,000 shares respectively. The company received applications
for 70,000 shares from public out of which applications for
19,000, 10,000, 21,000 and 8,000 shares were marked in
favour of A, B, C and D respectively.
Calculate the liability of each one of the underwriters. Also
ascertain the underwriting commission @2.5% payable to the
different underwriters.
Solution ...
Total liability = 30000 including firm underwriting ,
individual Liabilities :
A 30000- 19000-3600=7400-3000-1650 = 2750
B 30000-10000-3600=16400-2000-1650 =12750
c : 20000-21000-2400=-3400-1000=-4400+4400=0
d 20000-8000 -2400=9600-1000-1100=7500
final liabilities : A 5750, B 14750, C 1000, D 8500
total =30000
commission : 2.5% *15 * 30000= : A : 11250, B :
5 DECEMBER 09
11250, C : 7500 D : 7500
www.afterschool.tk
answer 10
From the following figures calculate the value of a
share of Rs. 10 on (i) dividend basis, and (ii)
return on capital employed basis, the market
expectation being 12%.
Yr Capital Empl Profit Dividend (%)

2005 5,00,000 80,000 12
2006 8,00,000 1,60,000 15
2007 10,00,000 2,20,000 18
2008 15,00,000 3,75,000 20
Solution ....
If you want to calculate value on dividend, let

us give weight to nearest year more than
previous year. Let us give weight of 4 (out of
10) to 2008 and 3 to 2007. accordingly :
(12*1 + 15*2+18*3 + 20*4) = 176
now divide it by 12, we get: 14.6
so value of share must be 14.6 rupees per share
solution...
If you want to calculate value on return on

capital employed, let us give weight to nearest
year more than previous year. Let us give
weight of 4 (out of 10) to 2008 and 3 to 2007.
accordingly :
(16*1 + 20*2+22*3 + 25*4) = 222
now divide it by 12, we get: 18.5
so value of share must be 18.5 rupees per share
Vivek Global Ltd. Has assets of Rs. 10 lakh,
liability of 6 lakhs and has earned ROI of 20% this
year. What is its value of share (face value100) ?
It has 1000 shares? Market expectation is 10%
return.
There are three methods :
1. intrinsic value method : (10-6) = 4
lakh/1000 = 400
2. yield method : ROI / MARKET RATE *
face value = 20/10 * 100 = 200
3. Fair price method : simple average of above
two methods : so = 300.
What will be value of share when networth and
profit were :
:2006 18,50,000 1,80,000
2007 21,20,000 2,00,000
2008 21,30,000 2,30,000
The company has Rs. 10,00,000 on equity shares of Rs. 100 each and
Rs. 3,00,000 in 9% preference shares of Rs. 100 each. The company
has investments worth Rs. 2,50,000 (at market value) on the
valuation date the yield in respect of which has been excluded in
arriving at the adjusted tax profit figures. It is usual for similar type
of companies to set aside 25% of the taxed profit for rehabilitation
and replacement purposes. On the valuation day the net worth
(excluding investment) amounts to Rs. 22,00,000. The normal rate of
return expected is 9%. The company paid dividends consistently
within a range of 8 to 10% on equity shares over the previous seven
years and the company expects to maintain the same. Compute the
value of each equity share on the basis of productivity.
Solution ....
Find weighted return for last 3 years AVERAGE
OF : 18/185 * 1 + 20/212*2 + 23/213 * 3 = 10.18%
now your networth is 22 lakhs, so 10.18% of this is
224000
less 25% for rehabilitation : 168000
less preference dividend : 9% on 3 lakhs: 27000 =
141000
capitalise it at 9% : 1551000
add investments (not taken above) : 2.5 lakh
5 DECEMBER 09
total valuewww.afterschool.tk
: 18 lakh approx. 16
What to do on acquisition of a
company ?
When a company buys another company, there
are two possibilities :
1. capital reserve
2. goodwill
when you are paying more than the value of
the firm – you are paying goodwill
when you are paying less than the value of the
firm – you have capital reserve
What to do with preacquisition
profit
Preacquisition profit is taken into account in

the value of the firm. It is adjusted while
calculating capital reserve / goodwill.
Consolidate the accounts of
holding and subsidiary company
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Sundry Assets 6,55,000 2,88,000
Equity shares of Investments:
Rs. 100 each 6,00,000 2,00,000 1600 shares of
General Reserve 60,000 25,000 Rs. 100 each 1,60,000 -
Profit and Loss
Account 80,000 15,000
Creditors 75,000 48,000
8,15,000 2,88,000 8,15,000 2,88,000
H Ltd. acquired shares in S Ltd. on 31st March, 2009. Prepare the Consolidated balance
sheet of H Ltd. and S Ltd. as on that date.
Solution
Show the capital of H = 6 lakh

out of capital of S, find minority share and
show it
Show general reserve of H
show general reserve of S and profit of S as
capital reserve (H's share) and minority
holding (remaining share).
Share of H in S is 160000/200000=4/5
Solution
Liabilities :
capital : 6 lakhs
Minority share : 40,000 + (25000+15000)*1/5 = 8000
General Reserve : 60000
Profit : 80000
Capital Reserve : (25000 + 15000)*4/5 = 32000
Creditors : H : 75000, S = 48000 = 123000
total : 943000
Assets :
H : 6,55,000 S : 2,88,000 =
total : 943000
Consolidate the accounts :
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
Rs. Rs. Rs. Rs.
Share Capital: Sundry Assets 5,91,000 3,18,000
Shares of Investments:
Rs. 100 each 6,00,000 2,00,000 1,600 shares of
General Reserve 60,000 40,000 Rs. 100 each 2,24,000
P& L Acct 80,000 30,000
Creditors 75,000 48,000
total 8,15,000 3,18,000 total 8,15,000 3,18,000
H Ltd. acquired the shares in S Ltd. on 30th June, 2009. The plant worth book
value of Rs. 60,000 included in sundry assets of S Ltd. was re-valued at Rs. 50,000
on this date.
Solution
Here you can see that for share worth Rs. 160000, holding
company has paid Rs. 224000. thus there is some goodwill
amount which has been paid. We have to calculate that
amount. Further, we also have to calculate minority interest –
as the holding company has 1600 out of 2000 shares of S Ltd.
For calculating minority interest take equity+share in general
reserve + share in profit - share in loss in revaluation
Calculation of goodwill :
Amount paid : 224000
total stake :
equity 160000
+ reserve + profit (40000+30000)*16/20 =
56000
loss on revaluation = -10000*16/20=-8000
total : 208000
Goodwill=224000-208000 = 16000
Solution... consolidated balance
sheet :
Liabilities :
Share : 6 lakhs
Minority interest : (200000+ 40000+30000-10000)* 4/20) = 52000
Reserve : 60000
Profit : 80000
creditors = H=75000+S=48000=123000
total =915000
Assets : H : 591000, S:308000 total :899000 ,
goodwill : 16000
total : 915000
Consolidate balance sheets :
Reserves and Profit and Loss Account (Cr.) of
S Ltd. stood at Rs. 25,000 and Rs. 15,000
respectively on the date acquisition of its 80%
shares by H Ltd Machinery (book-value Rs.
1,00,000) and Furniture (Book-value Rs.
20,000) of S Ltd. were revalued at Rs. 1,50,000
and Rs. 15,000 respectively for the purpose of
fixing the price of its shares; book values of
other assets remaining unchanged. These
values are to be considered for consolidation
purposes.
5 DECEMBER 09 See nextwww.afterschool.tk
slide for balance sheets 26
Balance Sheet of H Ltd. as on 31st March, 2008
Liabilities H Ltd.S Ltd Assets H Ltd. S Ltd.
Share Capital: Machinery 3,00,000 90,000
Shares of Furniture 50,000 17,000
Rs. 100 each 5,00,000 1,00,000 Other assets 4,40,000 1,43,000
Reserve 2,00,000 75,000 Shares in S Ltd.
800 shares at 1,60,000 -
P & Laccount 1,00,000 25,000
Creditors 1,50,000 50,000
9,50,000 2,50,000 9,50,000 2,50,000
Solution ...
Liabilities
share : 5 lakhs
minority interest :
reserve 2 lakh
p & l ac 1 lakh
creditors (1.5+.5) 2 lakh
Assets :
machine : 4.5 lakh
furniture : 65000
other assets : 5,83000
ACCOUNTING STANDARDS
Framed by ICAI
AS 1 to AS 31 (AS 8 is withdrawn)
Standards
AS 1- accounting policies
AS 2 : - inventory
AS 3 : Cash flow statement
AS 4 : events after balance sheet dates
AS 5 : profit
AS 6 : depreciation
AS 7 : construction contracts
standards...
AS 9 : revenue recognition
AS 10 : fixed assets
AS 11 : foriegn exchange
AS 12 : Govt. Grants
AS 13 : Investments
AS 14 : amalgamation
standards...
AS 15: employee benefits

AS 16 : borrowing costs
AS 17 : segment reporting
AS 18 : related party disclosure
AS 19 : lease
AS 20 : EPS
AS 21 : consolidated financial statement
Standards
AS 22: taxation
AS 23 : investment in association
AS 24 discounting of issue
AS 25 : interim financial reporting
AS 26: intangible assets
AS 27 : joint venture
AS 28 : impairment of assets
AS 29 : contingent liability
standards....
AS 30 : financial instruments – recognition and

measurement
AS 31 : financial instruments – presentation
International accounting standards
Formed by IASB
IAS 1 : financial statements
IAS 2 : Inventory
IAS 7 : cash flow statement
IAS 8 : accounting policies
IAS 10 : events after balance sheet date
IAS 11 : construction contracts
IAS 12 : Income tax
IAS....
IAS 14 : segment reporting
IAS 16: property plant and equipment
IAS 17 : lease
IAS 18 : revenue
IAS 19 : employee benefit
IAS 20 : govt. Grants
IAS 21 : foreign exchange
IAS 23: Borrowing cost
IAS
IAS 24 : related party disclosure
IAS 26: retirement benefit plans
IAS 27 : consolidated financial statement
IAS 28 : investment in association
IAS 29 : hiper-inflationary economy
IAS 31: Joint venture
IAS 33 : EPS
IAS 34: interim financial reporting
IAS
IAS : 36 : impairment of assets

IAS 37 : contingent liaiblities
IAS 38 : Intangible assets
IAS 39 : financial instruments
IAS 40 : investment inproperties
IAS 41 : agriculture
IFRS : INTERNATIONAL
FINANCIAL REPORTING
STANDARDS
IFRS 1 : first time adoption
IFRS 2 : share based payments
IFRS 3: business combination
IFRS 4 : Insurance contracts
IFRS 5: non -current assets
IFRS 6: mineral resources
IFRS 7 : financial instruments
IFRS 8 : operating segments
A company issued 10,000 shares of Rs. 10 each. Total
applications were for 12,000 shares; allotment was made
pro-rata. Application money was Rs. 2 per share and
allotment money Rs. 3 per share. Goti failed to pay the
allotment money on his 300 shares. How much is due
from Goti for allotment?
Goti must have applied for 12/10*300= 360

shares. He must have paid : 360*2 = 720, out
of which (300*2) = 600 have been adjusted in
application money and remaining 120 adjusted
in allotment. The total money due on allotment
is 3*300 = 900, so (900-120) = 780 is due from
Goti. Answer.
A company offers two shares for every five held to its
shareholders. The issue price is Rs. 14 and the rights
price in the market is Rs. 19. What is the market value
of a right?
Formula : new shares/total shares *( cum rights price – new

issue price)
=2/7 * (19-14)
=10/7 = 1.43
or
market value – average value
average value (19* 5 + 14*2) = 123 /7 = 17.57
(19 – 17.57) = 1.43 answer
Z Ltd. forfeited 150 shares of Rs. 10, issued at a
premium of Rs. 2, for non-payment of the final call of
Rs. 3. Of these 100 shares were re-issued @ Rs. 11
per share. How much is transferred to capital reserve?
We had received (10-3) = 7 per share, thus 150

* 7 = 1050. now 100 of these shares are
reissued at premium again, so all the amount
related to these 100 shares will be transferred
to capital reserve. So 100 * 7 = 700 will be
transferred to capital reserve.
The authorised capital of a company is 1,00,000 shares of Rs. 10 each. On April 10, 2008,
50,000 shares are issued for subscription at a premium of Rs. 2 per share. The share money is
payable as follows : Rs. 5 (including the premium of Rs. 2) with application, Rs. 3 on allotment;
Rs. 2 on first call and Rs. 2 on second call. The subscription list closes on May 11, 2008 and
directors proceed to allotment on May 18, 2008. The shares are fully subscribed and the
application money (including the premium) is received in full. The allotment money is received
by June 30, 2008, except as regards 500 shares. It is expected that the allotment money on these
500 shares will not be received. The first call and second call money is received by September
30, 2008 and December 31, 2009 respectively, barring the second call money on 200 shares
which is not received and which is not likely to be received.
1. Bank ac dr. 2.5 lakh

To share application 1.5 lakh
to share premium 1 lakh
2. share application dr. 1.5 lakhs
To share capital 1.5 lakhs
continued...
3. Share allotment dr. 1.5 lakh
To share capital cr. 1.5 lakh
4. bank dr. 1,48,500
To share allotment 1,48,500
5. first call dr. 100000
to share capital 100000
6. bank dr. 99000
to first call credit 99000
continued...
Second call dr. 100000

To share capital credit 100000
bank dr. 98600
to second call cr. 98600
Balance sheet
Liability side
Autorised capital : 10 lakhs
issued capital : 5 lakhs
paid up capital : 4,96,100
(due amount 3900)
Assets side
bank account : 4,96,100
both sides total 496100
X Ltd. forfeited 100 shares of Rs. 10 each for non-
payment of the final call of Rs. 2; the shares were
re-issued @ Rs. 9 per share. How much was
credited to shares forfeited account and what
amount was transferred to capital reserve?
We had received : 8*100 = 800 (transferred to

share forfeiture account).
we gave discount of 1*100 = 100
so 700 will be transferred to capital reserve.
A company having free reserves of Rs. 30,000 wants to
redeem rupees one lakh preference shares. Calculate the
face value of fresh issue of shares of
Rs. 10 each to be made at a premium of 10%.
Total money to be paid : 1 lakh

reserves available : 30000
so issue shares for 70000. Premium on shares
can be used only for premium on redemption,
so the face value of shares to be issued must be
70000. answer
Redemption of 10,000 preference shares of
Rs. 10 each was carried out by utilisation of
reserves and by issue of 4,000 equity shares
of Rs. 10 each at Rs. 12.5. How much should
be credited to capital redemption reserve
account?
Total money to be paid : 10*10000 = 1,00,000
money from share issue : 4000 * 10 = 40,000
remaining money 60000 has to come reserves,
so we will redit CRR ac by 60000. We will not
use premium received for this purpose.
DB corp Ltd. had allotted 10,000 shares to applicants for
14,000 shares on a pro rata basis. The amount payable was
Rs. 2 on application, Rs. 5 on allotment (including
premium of Rs. 2 each), Rs. 3 on first call and Rs. 2 on
final call. Rahul Borar failed to pay the first call and final
call on his 300 shares. All the shares were forfeited and
out of these 200 shares were re-issued @ Rs. 9 per share.
What is the amount credited to capital reserve?
Amount transferred to forfeiture a/c 5*300 = 1500, 200

shares were reissued, so discount of 1*200 was deducted
out of this, now remaining amount relating to 200 shares
can be transferred to capital reserve : 4*200=800
TRF Ltd. had issued equity shares of Rs. 10 each at a
discount of 6%. 200 of these shares had been forfeited
for non-payment of the first and final call of Rs. 2
each; 150 of these shares were later re-issued @ Rs. 9
per share. Indicate the balance in the Share Forfeited
Account and the Capital Reserve Account, resulting
from the above.
Amount tranferred to share forfeiture a/c : 200*5.4 = 1080

discount on share issued : 150*.4 =60
amt. Transferred to capital reserve : 5 * 150 = 750
balance in forfeiture a/c : 1080-(60+750) = 270
A company issues early in 2004 13% Rs. 20,00,000
debentures at Rs. 96 but redeemable at Rs. 103.
Redemption will be carried out by annual drawings of Rs. 4
lacs (face value) commencing at the end of 2008. What do
you recommend as the amount to be charged to the profit
and loss account, apart from that of interest?
We have got 1920,000 but we will pay 2060,000, the difference is

140,000, out of this 80,000 is discount and 60,000 is premium.
There are two methods to transfer loss of debentures to P & L
a/c – fixed instalment 2. fluctuating method. Here our balances
are reducing in annual drawings so we will use fluctuating
method. The balance of debenture outstanding each year is :
20,20,20,20,20,16,12,8,4, so first year's amount is : 20/140*140 =
20000 and last year's amount is : 4/140*140000 = 4000.
Rs. 40 lakhs 10% debentures are outstanding in the
balance sheet of a company on 31st March, 2007. The
company had not paid the six months interest after 30th
June, 2007. State the amount of interest on debentures
accrued and due as well as interest accrued but not due on
31st March, 2008.
Interest acrued and due 10%*40 lakhs* ½ =

2lakhs on 30 June 2007 now interest will be
due on Jan. 2008 and June 2008. so Interest
acrued but not due on 31 March = 10%*40
lakhs * 3/12 = 1 lakhs
Calculate the amount of discount to be written off
each year on the debentures of Rs. 60,00,000 issued
on 1.1.2008 at a discount of 5% repayable in annual
drawings of Rs. 10,00,000 each year. Accounting
period ends on 31st December.
Total discount to be transferred to P & L a/c 3

lakhs and we have 6 years.
Here we have to use fluctuating method. So
here balance at the beginning of the year would
be : 60,50,40,30,20,10, so discounts allowed
will be : 6/21 *3 lakhs = 85500 and so on.
Rajasthan Punjab Roadlines Ltd. shows in its balance
sheet 9% Rs.30,00,000 Debentures; interest on these is
payable on 31st March and 30th September. On 1st June,
2007 the company purchased as investment Rs. 50,000 of
the debentures @ 89. What will the company show in
balance sheet?
The company will show in the liabilities side :

Rs. 30 Lakhs and in the assets side 89/100 *
50000 = 44500.
P. Ltd. issued Rs. 10,00,000 13.5% Debentures at a discount of
5%; the debentureholders have an option of converting the amount
into Rs. 10 equity shares at a premium of 10%. A debentureholder
holding Rs. 40,000 debentures wishes to exercise the option. How
many shares will he get?
40000*100/110*1/10 = 3636 shares
A subsidiary sold goods to the holding
company on the basis of cost plus 25%.
At the end of the year the stock in trade of
the holding company included such goods
amounting to Rs. 80,000. 25% of the
shares of the subsidiary are held by
outsiders. What is the amount of stock
reserve required?
Solution
First find out the cost of these goods :

80000*100/125 = 64000
thus difference is 16000, for which stock
reserve has to be created. However, 25% profit
goes to outsiders (minority holders), we have
only 75% stake, so 16000*75/100 = 12000 is
the amount of stock reserve to be created.
Which of the following will not be included in
preliminary expenses:- a. Cost of preparation of
Memorandum of Association and Articles of
Association. b. Cost of preparation and issue of
the prospectus. c. Cost of acquisition of a
running business. d. Stamp duty on the
authorised capital. e. Cost of the project report.
Preliminary expenses do not include cost of

project report and cost of acquisition of a
running business out of these.
Borar & Samsukha Ltd. starts developing a new production
process. During the year, expenditure incurred was Rs.20
lakhs, of which Rs.18 lakhs was incurred before 1st March,
2007 and 2 lakhs was incurred between 1st March, 2007 and
31st March, 2007. The company demonstrated that on 1st
March, 2007 the production process met the criteria for
recognition as an intangible asset. The recoverable amount
of the know-how embodied in the process (including future
cash outflows to complete the process before it was available
for use) was estimated to be 10 lakhs. What is the value of
the intangible asset as on 31st March, 2007?
Samsukha & Borar Ltd. purchases an exclusive right
to generate hydro-electric power for fifty years. The
costs of generating hydro-electric power are much
lower than the costs of obtaining power from
alternative sources. It is expected that the
geographical area surrounding the power station will
demand a significant amount of power from the power
station for at least fifty years. What is the period over
which the company should amortize the right to
generate power?
As per AS – 26 – amortise it in 50 years.

Goti & Borar Ltd. purchases an exclusive right to
operate a toll motorway for twenty five years. There is
no plan to construct alternative routes in the area served
by the motorway. It is expected that this motorway will
be in use for at least twenty five years. What is the
period over which the company should amortize the
right to operate the motorway?
25 years
Samsukha & Gautam Ltd. Acquire an
exclusive right to operate a toll motorway
for next 3 years. They spend Rs. 30 Lakhs
for this. However, based on revised
estimate it is estimated that they will get
Rs. 27 lakhs from this project. What is
impairment losses?
30-27 = 3 lakhs
differentiate the following terms
and the treatment given in Cost
Accounts: Waste
Scrap Spoilage
Defectives.
Solution ...
Waste – cannot be sold – it is visible or inivisible part of

loss of resources, includes smoke, etc.
Scrap can be sold – it is produced with main production
spoilage is dective item – which can be sold as seconds
defectives can be improved with greater material and
labour. Normal costs are included in cost, but abnormal
costs are transferred to costing Profit and loss account.
Calculate reorder level ? :
Re-order quantity 6,000 units
Minimum stock (for emergencies) 5 weeks
Average delivery time 4 weeks
Maximum stock level 20 weeks
Average consumption per week 400 units
Minimum consumption in 4 weeks 1,200 units
Solution
To calculate this we take help of maximum

level :
Maximum level = (reorder level+ reorder
quantity) – (mini. Use * min. Quantity)
20*400=(X + 6000) - (5*300)
8000=X +4500
X =3500
A company whose profit runs into
lakhs of rupees and has large
inventories finds at the end of
March 2008 that the stock sheets,
for 31.3.2007 were over-cast by
Rs. 10,000 what to do ?
It is a old matter - further it is related to stock
– which are continuously physically verified –
do nothing.
The Provision of tax at the end of 31.3.2007 stood at
Rs. 1,50,000; during 2007-08 the tax liabilities upto
31.3.2007 were settled for Rs. 1,37,000. Provision
required in respect of 2007-08 is Rs. 41,000. what to
do?
Make a provision – pass the entries :
Provision for tax. 13000
to P & L appropriation a/c credit 13000
P & L A/c Debit
to Provision for tax. 41000
Government has allowed a refund
of excise duty with effect from 1st
January, 2007; it works out @ Rs.
5,000 p.m. What to do ?
Calculate total amount -
entry :
1. Bank a/c Debit
Refund from Excise Credit
2. Refund from Excise Debit
to P & L A/c credit
The company entered into a
speculative deal in raw materials
and earned a profit of Rs.
1,00,000.
1. Bank a/c debit

to Income from Speculation 1 lakh
2. Income from Speculation Debit
to P & L a/c credit 1 lakhs
Government imposed a penalty of
Rs. 30,000 for non-payment of
P.F. dues in time.
Penalty of P F dues debit

to Bank
P & L a/c debit
to Penalty of P F dues. 30000
A company acquires plant and machinery on 1st
October, 2007; it paid Rs. 30,00,000 to the supplier
and incurred transport charges of Rs. 1,00,000
installation charges of Rs. 1,00,000 in addition to
repairs of Rs. 1,40,000 because of accidental damage
during transit. Depreciation according to Schedule
XIV is 15% and its life is estimated at 15 years. The
accounts are closed on 31st March each year. What is
the figure at which the asset will be capitalised and
what is the depreciation charge for the first year?
Repairs will not be capitalised – but rest will be capitalised – so
value of machine : 32 Lakhs. Depreciation : 15% = 480000*6/12 =
240,000 as per w.d.v. Or 32,00,000*6/12*1/15 = 101333 (Straight
line)
A company has Rs. 10,00,000, 20% debentures at
issue; interest is payable on 30th September and 31st
March, interests warrants being issued on the 6th
October and 6th April respectively. The company
closes its books of accounts on 31st March. Show the
relevant items in the balance sheet.
In liability side :Outstanding interest : Interest

on debenture : 1 lakh outstanding
Secured liability : Debentures : 10 Lakhs
A company pays interest on 30th June and 31st
December on its 50,000 20% debentures of Rs. 100
each; the books are closed on 31st March. How will
the relevant items appear in the company’s balance
sheet?
Secured debentures : 50 lakhs

current liability : outstanding interest : 2.5
lakhs (for 3 months from Jan. To March).
Y Ltd. earned a profit after tax of Rs. 5,00,000 in
2005-06 and it wanted to pay a dividend of 20 % on
its capital of Rs. 15,00,000. What will be the
balance left in the Profit and Loss Account?
5 lakhs – 3 lakhs
it will also have to transfer some amount to
reserve account (minimum 7.5% has to be
transerred to reserve as per sec. 205(2a))
transfer to reserve : 37500.
= 163500 is left out after dividend
Y Ltd. earned a profit after tax of Rs. 5,00,000 in
2005-06 and it wanted to pay a dividend of 30 % on
its capital of Rs. 15,00,000. What will be the
balance left in the Profit and Loss Account?
5 lakhs – 4.5 lakhs

it will also have to transfer some amount to
reserve account (minimum 10% has to be
transerred to reserve as per sec. 205(2a))
transfer to reserve : 50,000
Nothing is left out after dividend
Z Ltd. has been paying dividend @ 20% on capital
of Rs. 20 lakh for many years in the past; its average
after tax profits were Rs. 6,00,000. In 2007-08 it
earned a profit of Rs. 5,00,000 and needing funds
for working capital it proposed to transfer Rs.
2,00,000 to Reserves. Can it do so? If not, what is
the amount that may be transferred?
If a company wants to transfer more than 10% to reserve, following

conditions must be fulfilled :
a. if it pays dividend – pay it at average rate of last 3 years.
b. if it doesnt pay dividend – transfer it at rate lower than the average
rate of dividend for last 3 years. So max. It can transfer is 19%
S Ltd. has been paying dividend @ 12% on its capital
of Rs. 30 lakhs; its free reserves totalled at the end of
2006-2007 to Rs. 20,00,000. In 2007-08 it suffered a
loss of Rs. 2,30,000 but it still wants a dividend, if
necessary by drawing from reserves. What is the
maximum rate of dividend that will be permissible?
Sec. 205 A : conditions are :
1. rate of dividend shall not be more than 10% and more than the
average for last 5 years.
2. Reserve after dividend will be min. 15% of capital
3. Max. Amount that can be drawn is 10% of captial + reserve and it
should be used to set off loss first.
So Max. Draw : 5 lakhs, less loss : 230000= 270000 it can pay max.
10% dividend, but here it will pay max. 270000 only.
D Ltd. wants to pay a dividend but finds itself short of
cash. There is, therefore, a proposal that the company
should distribute among the shareholders the shares
held by it in F Ltd. by way of dividend. Advise the
company.
Dividend can be declared only in cash. So this

proposal is not acceptable.
Land and Buildings (Cost Rs.
5,00,000 depreciation provided
Rs. 80,000) sold for Rs. 7,50,000.
Here we are having profit of 3,30,000 out of

this 250,000 must be transferred to capital
reserve but 80,000 can be transferred to P & L
account as normal revenue (because it is
against depreciation). .
It was discovered in September 2007 that the purchase
invoice of Rs. 50,000 dated 11.2.2006 was not entered
in the book at all; accounts for 2005-06 were passed at
the AGM in August, 2007.
It is an error of omission. Rectify it by

following entry :
P & L appropriation a/c debit 50000
While preparing the accounts for 2006-2007 closing
stock was valued at market price Rs. 6,20,000
instead of cost which was Rs. 6,50,000.
Stock is valued is lower of market price or cost

– so there is no problem here
In June, 2007 post manufacturing
excise duty totaling Rs. 6,00,000
was paid in respect of 2005-06
and 2006-2007.
Debit P & L appropriation account. By Rs. 6

lakhs for excise
The market value of the quoted
investments is Rs. 2,25,000 as
against the cost of Rs. 2,50,000.
Show the investments at market value in the

balance sheet.
Railway claim for goods lost in transit in 2005-06
costing Rs. 40,000 settled in 2006-2007 for Rs.
30,000. No entry was passed in 2005-06.
Here we have got Rs. 30000, which is income

(we had not recognised it earlier), so show this
income in accounts.
No entry for loss of Rs. 10000 – as we had not
recognised it earlier.
Sales tax, collected from
customers, Rs. 1,50,000 against
which amount paid is Rs.
1,20,000.
We have to pay remaining amount of Rs.

30000 also – so show this amount as current
liability.
Subsidy, Rs. 1,00,000 received
from Government for installation
of generating set.
We can reduce the amount of Generatin set by

Rs. 1 lakhs
or
we can show it as capital reserve
Balance held in the Bank of Iraq,
Baghdad, Rs. 25,000.
As per company law requirements, we have to

disclose the name of the bank and also the
maximum amount deposited with that bank (in
case of foreign banks).
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ACCOUNTING FOR PUBLIC

Liability of Green : 30000-26000 = 4000

Liability = 18000, no information about

Outstanding liability : 2000, 80% of which is

Yr Capital Empl Profit Dividend (%)

If you want to calculate value on dividend, let

If you want to calculate value on return on

Preacquisition profit is taken into account in

Show the capital of H = 6 lakh

AS 15: employee benefits

AS 30 : financial instruments – recognition and

IAS : 36 : impairment of assets

Goti must have applied for 12/10*300= 360

Formula : new shares/total shares *( cum rights price – new

We had received (10-3) = 7 per share, thus 150

1. Bank ac dr. 2.5 lakh

Second call dr. 100000

We had received : 8*100 = 800 (transferred to

Rs. 10 each to be made at a premium of 10%.

Total money to be paid : 1 lakh

Amount transferred to forfeiture a/c 5*300 = 1500, 200

Amount tranferred to share forfeiture a/c : 200*5.4 = 1080

We have got 1920,000 but we will pay 2060,000, the difference is

Interest acrued and due 10%*40 lakhs* ½ =

Total discount to be transferred to P & L a/c 3

The company will show in the liabilities side :

40000*100/110*1/10 = 3636 shares

First find out the cost of these goods :

Preliminary expenses do not include cost of

As per AS – 26 – amortise it in 50 years.

Waste – cannot be sold – it is visible or inivisible part of

To calculate this we take help of maximum

1. Bank a/c debit

Penalty of P F dues debit

In liability side :Outstanding interest : Interest

Secured debentures : 50 lakhs

5 lakhs – 4.5 lakhs

If a company wants to transfer more than 10% to reserve, following

Dividend can be declared only in cash. So this

Here we are having profit of 3,30,000 out of

It is an error of omission. Rectify it by

Stock is valued is lower of market price or cost

Debit P & L appropriation account. By Rs. 6

Show the investments at market value in the

Here we have got Rs. 30000, which is income

We have to pay remaining amount of Rs.

We can reduce the amount of Generatin set by

As per company law requirements, we have to

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Interest acrued and due 10%40 lakhs ½ =

40000100/1101/10 = 3636 shares